Why I Still [Heart] Trade War, US Federal Shutdown

I've just come from an engaging talk by Martin Wolf at the LSE. In his take on one of Aesop's fables, China and other industries have been, in recent years, industrious "ants" busy saving up through thrift and industry. Meanwhile, the likes of the US and the UK have been loafing around, singing a happy tune. Making his own elaboration, he adds "locusts" or financial intermediaries we've come to know more than we would probably like in the aftermath of the subprime crisis who perform the task of intermediating between the "ant" and the "grasshoppers."

Depressingly, Martin Wolf lays out a global picture which is remarkably unchanged despite the aforementioned crisis (the podcast should be uploaded to the LSE Events site in the next few days for you to listen to). Various LDCs have now accumulated an unbelievable $9 trillion in reserves by his estimate after slowing down their rate of accumulation in the immediate wake of the US-manufactured debacle. Speaking of whom, the Americans have been acting like themselves in acting out the ol' "deficits don't matter tune"--lip service aside, no one has the political will in that dissipated land to do anything about it.

This brings me to something I wanted to ask of Wolf but ran out of time: We've been talking about global economic imbalances since 2003 or 2004 and how increasing savings in places alike the US (making them more "ant"-like) and increasing consumption in the surplus countries alike China (making them more "grasshopper"-like) should help mitigate these imbalances. Well, it hasn't happened. Despite the novel analogy, the facts remain largely unchanged.

It seems to me that we need to shake both parties out of their complacency. How can that happen? Again, I can think of two ways that global economic imbalances can be mitigated in one fell swoop:

First, a nice US-China trade war should solve the problem of capital flowing uphill from where there are more investment opportunities (the PRC) to where there are less (the US), hence investment in non-productive activities alike residential fixed investment. No capital flows, no imbalances, period. I've been quite keen on this confrontational approach of the US and China just cutting the crap and putting their money here their mouth is at for quite some time now.

Second, a newer idea is inspired by the current congressional budget impasse in Washington. While bickering over $61 billion worth of cuts is quite pointless insofar as the US will most likely run a deficit well over $1 trillion next year, look on the bright side: Republicans are threatening to stop drip-drip-drip feeding Washington and let the federal government shut down. In reality, of course, only a few government agencies will stop, leaving the diplomatic service and other apparatus of American influence running. Still, you can imagine a prolonged "starve-the-beast" episode where intractable differences drag on, causing massive hits to confidence in America's ability to run day-to-day.

Two attractive scenarios obtain here in the interest of solving global imbalances: (a) the US becomes unable to service its gargantuan debts and hence defaults on "AAA" Treasuries, causing massive investor panic among those dumb enough to hold such dollar-denominated detritus; or (b) investor fears over hampered debt service ability owing to significantly diminished revenue collection makes folks shun US sovereign debt in droves. Voila! Cutting off funding to the world's largest issuer of such instruments solves the problem of reserve overaccumulation overnight.

Wouldn't it be nice? Martin Wolf has been talking about the resolution of global economic imbalances for a very long time now, but to no avail. So, our American friends, write to your senators and congresspersons about how much a blanket tariff on all Chinese imports is necessary, or how a federal government shutdown is required to show the world conservatives mean business. Maybe the Tea Party won't be so bad if something along these lines pushes through.

Besides, ain't it about time we figured out who's got the biggest balls in today's global economy?